Making Sure Your Premiums Pay for Care

By Kathleen Sebelius, Secretary of Health and Human Services
Posted August 17, 2010

Today, the National Association of Insurance Commissioners (NAIC) approved a preliminary set of recommendations for implementation of the Affordable Care Act’s provisions relating to an insurer’s medical loss ratio – the percentage of the premium dollar spent on providing care and improving quality, rather than on administrative costs.  I want to thank the NAIC and individual Commissioners for their recommendations, which reflect months of work and the input and perspective of state regulators, insurers, consumers, and others. I look forward to reviewing these recommendations in detail.

Too many Americans are paying too much for health insurance and getting too little in return. The medical loss ratio provisions of the Affordable Care Act will be a critical tool for federal and state regulators to rein in insurance rates and protect consumers’ rights. This policy will shine a bright light on insurers that are spending too many premium dollars on overhead and administrative expenses like marketing, medical underwriting, executive salaries, and bonuses that don’t improve health outcomes and drive up costs. The insurance reforms require the plans sold in the large group market to spend at least 85% of premiums on care and quality, while those in the small group and individual markets will need to spend at least 80% on health-related costs.

This policy also gives insurers new incentives to keep premiums affordable. Beginning in 2011, all insurers will be required to report their medical loss ratio and if companies are spending too much on overhead and administrative costs, consumers will receive rebates.

I share the NAIC’s commitment to implementing this policy quickly and carefully. This year, our Department will issue a series of regulations that build on the NAIC recommendations and implement the medical loss ratio policy.  The first of these rules which will be issued as soon as possible will build on the NAIC’s work to spell out how the terms used to calculate and report MLRs are defined. This information will allow insurers to begin to collect the data needed to implement this policy.  

The Department will also issue regulations to determine how consumer rebates will be calculated and how adjustments could be made to the medical loss ratio threshold in the individual market if substantial evidence indicates that the new rules would result in market destabilization.  As a former State Insurance Commissioner, I share NAIC’s belief that the methodology for determining rebates requires additional research and input.  For example, we must think carefully about small insurance plans, new plans, different types of plans, and other special circumstances.  Equally important is developing a way to assess when an adjustment should be made to the medical loss ratio threshold in a particular state based on the potential volatility in the individual market.  I look forward to NAIC’s future recommendations on these topics.

Working in partnership with NAIC, consumers, insurers, policymakers, and others, I am confident the medical loss ratio policy will be implemented responsibly, carefully, and swiftly.  We have recently heard reports that some issuers are making decisions about participation in particular markets based on the effect of these requirements. As we move forward, I urge insurance companies, consumer groups and other stakeholders to continue to participate in the process.  It is premature for insurers to make business decisions about participation in particular markets based on rules that have yet to be published, or to apply for exemptions to rules that have not yet been drafted.  We all must continue to keep our focus on our shared goal – improved access and affordability for American consumers to high-quality health care.

HHS will not enforce these rules against issuers of stand-alone retiree-only plans in the private health insurance market.